Government Acquirers

Local governments are becoming increasingly active players in the telecom facilities game, and are paying prices for finished data center assets that exceed many marketplace notions of their value. The county commissioners of Sarasota County, Florida this week approved spending $3.5 million to purchase and equip a former Arthur Andersen data center.

The county will pay $1.75 million for the 14,108 square foot finished data center and equipment including 300 servers, and pump another $1.02 million into the facility to convert it to their use. The remainder of the costs reflect the assumption of an existing lease and employee salaries, according to local media reports.

The $1.75 million purchase price is about $124 a square foot. When you add in the additional retrofit cost, that number is closer to $196 a square foot - all of which gives the county the right to assume the lease at $280,000 a year (nearly $20 a square foot).

That struck the Sarasota County commissioners as a bargain. "The county's auditor, Ernst & Young, analyzed the deal and said the servers and other information technology equipment and the data center's specialized equipment, such as backup power systems, would bring $3.27 million if sold in a bankruptcy," according to the story in the Sarasota Herald Tribune.

This comes on the heels of last week's move by the Kansas City (Mo.) council to issue $44 million in bonds to fund the purchase and upgrade of an existing Ameritrade data center for use by Mastercard. The facility is 60,000 square feet, suggesting an eye-popping price for the completed facility of better than $700 a square foot. Even when you remove the incidentals from the deal, you're left with a large number.

In recent weeks, CarrierHotels.com and its affiliate Node Com have spent a lot of time researching data center deals completed in the past 18 months. Discussions of valuation and existing sales involve "apples vs. oranges" comparisons, as transactions vary widely in structure (fee-owned vs. leases, buildings with tenants versus empty sites) and often include a combination of cash and non-cash considerations.

But one thing that's clear from the recent government purchases is that end users are willing to pay for these assets, even in a buyers' market with plenty of supply.

While investors and corporate users are free to shop in several cities at once, government deals are driven by geography. If the goal is to create local jobs (as in Kansas City), the jobs need to be local to meet that goal. If a government wants to use the facility itself (as in Sarasota), it can't very well invest residents' tax dollars in another jurisdiction.